0. Preparing a Workforce for the Next Arizona Economy
McKinsey & Company
November 17, 2011
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of McKinsey & Company is strictly prohibited

1. The US has lost 3 to 5 times as many jobs as those lost in any other post-war recession
Millions of jobs lost from peak prior to recession 5X 3X
SOURCE: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis

2. The US is a long way from recovering the lost jobs
Millions of jobs
Net jobs lost
-6.7
2.1
-8.8
SOURCE: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis

3. Unemployment rates vary by degree level
Percent
College graduates
Young college graduates
Young high school graduates
Young people without a high school diploma
1 Total employment equals the number all employed workers in the economy, including full-time, part-time, and self-employed
2 Net employment change as a share of total employment in the base year (e.g., 1990 for 1990s)
SOURCE: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis 3

4. In the long term, the cost of unemployment is in the trillions of dollars
USD billions
4,500
Lost lifetime income for today’s unemployed
2,500
Lost output due to unemployment
400
UI pay-
outs
SOURCE: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis

5. A quarter of Americans surveyed “feel the American dream is not really alive today”
Percent of surveyed
1986
2003
2011

6. A new job market?

7. The period between GDP recovery and employment recovery has been increasing
Gap between GDP returning to pre-recession peak and employment returning to pre-recession peak
Months
“Jobless recoveries” ? 8
Year in which the recession began
1948
1953
1957
1960
1969
1973
1981
1990
2001
20081
1 GDP returned to its pre-recession peak in December 2010
SOURCE: U.S. Bureau of Labor Statistics; U.S. Bureau of Economic Analysis; McKinsey Global Institute analysis 7

8. In contrast to the past, firms today are more likely to lay off workers during a recession than suffer declines in productivity
Contribution to change in real GDP during recessions
Compounded quarterly growth rate,1 peak to trough (%)
100% =
-0.65
-0.53
-0.45
-0.27
-0.70
Employment loss 32 51 75 98 98
Productivity loss 2 2
1973–75
1981–82
1990–91
2001
2007–09
1 Calculated from the onset of recession to trough of GDP. Calculations use real GDP estimate (2005 chained dollars) and total employment (full time and part time) for workers ages 16 and over.
SOURCE: US Bureau of Labor Statistics; US Bureau of Economic Analysis; McKinsey Global Institute analysis 8 8

9. The number of new businesses has declined dramatically in this recession
Change in number of private-sector establishments launched every year
March 1993 to March 20101, thousands
667
-23%
656
634
631
633
627
612
609
603
548
505
The US would have 1.8 million more jobs had the 2007 rate of start-ups continued
2000 01 02 03 04 05 06 07 08 09
2010
1 Calculated using U.S. Bureau of Labor Statistics Business Employment Dynamics data set. The annual number indicates the number of businesses less than 1 year old that were in existence in March of that year.
SOURCE: U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis 9

10. Low-skill occupations had the highest job losses in all sectors
<1,000 job change
>100,000 job loss
1,000-10,000 job gain
10, ,000 job loss
>10,000 job gain
Annual net employment change from 2007–20091
Thousands of jobs
1,000-10,000 job loss
Most significant source of occupational training
On-the-job training
Work experience
Vocational award
Associate degree
Bachelor’s degree
Bachelor’s plus work experience
Graduate degree
Manufacturing
Administrative & support services
Retail
Construction
Finance and insurance
Transportation and warehousing
Business services
Wholesale
Real estate
Accommodation & food services
Educational services
Government
Health care
Industry
1 Calculated using U.S. Bureau of Labor Statistics Occupational Employment statistics data, which do not include farm, self-employed, or new entrants to the labor market
SOURCE: U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis 10

11. The unemployment rate varies widely across the country
>10%
9–10%
8–9%
7–8%
6–7%
5–6%
<5%
Unemployment rate, December 2010
% unemployed
SOURCE: U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis 11

12. Mobility in the United States has been declining since 1990 and is at a 50-year low
Annual domestic migration rate, 1948–2009
% of residents who have changed addresses during the past year
Long-run
average =
18%
In the 1950s and 1960s, 1 in 5 Americans changed residences every year . . .
. . . but that figure has now dropped to 1 in 10
1950
1960
19701
1980
1990
2000
2009
1 Data from 1970–1981 are interpolated due to data constraints.
SOURCE: U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis 12

13. Cyclical | Structural | Institutional
Are we asking the right question?
Cyclical |
Structural |
Institutional

14. How many jobs does the US economy need to produce?
MCKINSEY CONFIDENTIAL AND PROPRIETARY
How many jobs does the US economy need to produce?
Employment needed to achieve 5% unemployment rate by 2020
Millions
Employment
In 20101
139.1
Replace lost jobs
7.1
21 million
Net new entrants
to workforce2
14.3
Full employment
in 20201
160.4
1 Total employment, including self-employed and part-time workers
2 New entrants include student inflows, net immigration inflows, return of discouraged workers, and exits of retirees
SOURCE: Bureau of Labor Statistics’ Current Population Survey; McKinsey Global Institute analysis

15. Is it possible to produce 21 million jobs?
Real GDP compound annual growth rate
Percent
Net employment change
Increase in total employment2
Percent
Total employment1
Millions
1950s
6.9 12
3.5
1960s
12.9 20
4.2
1970s
20.6 26
3.2
1980s
19.5 20
3.2
1990s
18.1 15
3.4
9.2 7
2.4 2
1.7
2.2
1 Total employment equals the number all employed workers in the economy, including full-time, part-time, and self-employed
2 Net employment change as a share of total employment in the base year (e.g., 1990 for 1990s)
SOURCE: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis 15

16. Has automation and information technology permanently reduced the need for workers?
Has globalization permanently priced US workers out of the global labor market?
Does growth in non-traded sectors come at the expense of traded sectors?

17. How must institutions
change?

18. How must schools, colleges and universities change what and how they teach?
How must businesses change the way they recruit and train?
How should government change its priorities and the way it operates?

19. Skill
Share
Spark
Speed

20. Ensure more Americans acquire the skills that match employers needs
Demand vs. supply – 2020 projections
Millions
Difference
168.9
163.3
+5.9
No high school diploma
13.6
19.5
High school graduate
43.3
44.1
+0.8
Some college, no degree
30.7
29.1
-1.6
1.9
Associate degree
17.7
19.6
Bachelor’s degree or higher
58.0
-1.5
56.5
Demand1
Supply
1 Labor demand from MGI high job-growth scenario
SOURCE: U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis 20

21. Help US workers to win market share
Potential visitors lost
Actual overseas visitors
Number of overseas visitors in the US
Millions 36 34 34 31 29 26 27 24 24 23 2 26 24 25 24 22 22 22 19 20 18
From 2000 to 2009, international long-haul travel increased by 31%
Had the US simply kept pace with this growth (maintaining market share), an additional 68.3 million visitors would have entered the US over the past decade
With average spending of over $3,000 per international visitor, these lost visitors represent $214 billion in lost direct revenue over decade and ~500,000 US jobs
2000 01 02 03 04 05 06 07 08 09
SOURCE: WTTC

22. Restore the new business growth engine
Entire economy without startups
Entire economy
Net job creation in US establishments
Thousands of employees 77 79 81 83 85 87 91 93 95 97 99 01 03 05 07 09
1 Startups refer to new businesses, i.e. firms less than 1 year old
SOURCE: BDS, Kauffman

23. 46 environ-mental reviews
Speed up processes
US has a lengthy and complicated set of regulatory/ permitting requirements
This lack of speed can act as a major competitive disadvantage
EPA
“It is much easier to site and build a factory in China than it is in the US. For a manufacturer, two year advantage in building a plant may be everything”
A power plant built in Wisconsin required 46 environment approvals
US Army Corp of Engineers
FAA
46 environ-mental reviews
FERC
Six state agencies
“The real threat to our industry is the slow, cumbersome, and out-of-date system that we use to manage our”
- Executive of Corporation
State historical society
City, country, and others
Other
SOURCE: RFF “Reforming Permitting”; expert interviews

24. Skill
Share
Spark
Speed

25. Why can't students, workers, and employers have as useful information as marketers and investors?

26. Why shouldn't what you learn on the job be worth as much as what you learn in school?

27. How can we turn the unemployment system into a re-employment system?

28. Incentives and support to innovate
Make it easier to invest in the US
Prioritize a high skill, high share, high spark, and high speed economy
Joint commitment to solving these issues

29. Thank you